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The Globe and Mailreports that Eli Lilly "has escalated a challenge it launched last year against Canada’s patent rules under the North American free-trade agreement, and is now demanding $500-million in compensation after the company lost its Canadian patents on two drugs."

The drugmaker had originally asked for $100 million in its November 7, 2012 notice of intent to sue Canada using the investor-state dispute settlement process in NAFTA, which we wrote about here. That money was to compensate Eli Lilly for the Canadian court-ordered invalidation of its patent for the ADHD drug Strattera. The notice claimed numerous violations of NAFTA's investment protections, including fair and equitable treatment, national treatment and expropriation.

The additional $400 million in this second NAFTA notice attacks the Supreme Court's decision in May this year to invalidate a patent for Zyprexa, the company's best-selling anti-psychotic drug whose patent expired in the United States in 2011. The patent had expired in Canada, too, but who cares! What do they say about old wounds...

Both cases, now merged into one mega-lawsuit (or at least the threat of a suit), challenge Canada's "promise doctrine" in which a judge will sometimes consider the promises a company makes about its product when the patent is filed when deciding whether to invalidate that patent. Often this decision takes as a result of a challenge to the patent by a would-be generic competitor. Eli Lilly says this "judge-made law" violates NAFTA's and the WTO's intellectual property rules.

I've linked to Public Citizen's May 2013 report on this NAFTA case before but in a few words, here is a big reason why it's important for Canada, and why the case is being closely watched globally:

Eli Lilly lambasts this patent policy framework as “discriminatory, arbitrary, unpredic table and remarkably subjective.” It presumes to declare what Canada’s standard of patentability policy should be – that Canada must issue a patent and allow a drug firm to charge monopoly prices if an invention simply claims utility without demonstrating it. This is a critical point: Eli Lilly is asking the NAFTA investor-state tribunal to award compensation for a violation of its investor rights because Canada enforced its patentability standards, even though the underlying NAFTA provisions covering patents provide signatory countries flexibility to determine their own substantive standards for patentability.

The U.S. corporate and government watchdog predicts that if the Eli Lilly case succeeds, or perhaps if the federal government settles with the company beforehand, it will invite any number of similar lawsuits from other drug companies that have had their patents invalidated for failing to live up to their promises. A victory for Eli Lilly may also embolden brand name drug companies to use U.S., Europea or Canadian investment treaties to challenge other countries' patent systems because, as the firm claims in this NAFTA suit, those systems differ from EU or US norms.

Eli Lilly claims recent Canadian court decisions invalidating three of its patents have cost the firm $1 billion and forced it to cut 280 jobs in Canada since 2006. But spokespeople for the generic industry told the Globe and Mail that overall the rules governing patents in Canada are more favourable to the brand name companies.

The article quotes McGill University law professor Richard Gold saying Canada's patent practices do not violate any international treaties, and that the number of patents struck down by the promise doctrine in Canada has actually decreased in the past few years.

MAKING THINGS WORSE: CETA, FIPA, TPP

Intellectual property rights will be covered by a proposed investment chapter in the Canada-EU trade deal (CETA) which would also include investor-state dispute settlement. However, according to recently leaked copies of that chapter, as of May this year the two sides had not agreed on whether the WTO-consistent revocation or limitation of patents would be exempted in such a way that a drug company could not claim that an invalidated patent was a type of government expropriation.

Canada is proposing this language, the EU is resisting on behalf of its powerful brand name drug industry. But the difference in positions hardly matters compared to the presence at all of these excessive investor rights in the Canada-EU deal.

Despite how frequently Canada is sued under NAFTA for legitimate, non-discriminatory policies like the "promise doctrine" (in the Eli Lilly case) or Quebec's moratorium on fracking (in the Lone Pine NAFTA case), the federal government continues to court more and more of these lawsuits in deals like CETA, the Trans-Pacific Partnership and the Canada-China Foreign Investment Protection Agreement.

It's like talking to a brick wall when you bring up the problems of investor-state dispute settlement with Canadian trade officials. Thankfully there is some hope in Europe where all three left and centre-left parties, including the Socialists & Democrats, now oppose investor-state dispute settlement altogether in the EU's trade deals with Canada and the United States. Eli Lilly's escalation in this highly sensitive case would probably embolden that opposition.

The notice of intent from Eli Lilly is the first stage in an investor-state dispute under NAFTA. After an unditermined period of consultation with the government, the company may then file a notice of claim to arbitration. We'll keep you posted.